Estate planning expresses your wishes about whom you want to receive your assets at the end of your life—but it involves a good bit more than that. There are tax considerations involved, and issues regarding end-of-life care and gifts you make during your lifetime.
The Internal Revenue Code (IRC) once provided some tax breaks for the financial costs of taking care of all these details, but they were terminated when the Tax Cuts and Jobs Act (TCJA) went into effect in 2018. Expenses associated with tax planning are no longer deductible in tax year 2022, but this could change in the future. For now, a few rarely claimed deductions have survived.
- Costs associated with estate planning were itemized miscellaneous deductions before the Tax Cuts and Jobs Act (TCJA) went into effect in 2018.
- The TCJA has eliminated itemized miscellaneous deductions from the tax code, at least through 2025.
- Two rarely claimed tax breaks remain for beneficiaries of estates.
- Tax rules for estates have fared much better under the terms of the TCJA.
Some Estate Planning Fees Are Still Tax-Deductible
Although most expenses resulting from estate planning lost their tax-deductible status in 2018, a few costs associated with planning and managing an estate have escaped the TCJA axe.
Gifts Made During Your Lifetime
You can still claim a tax deduction in 2022 for gifts you give away while living. This is an itemized deduction, but it’s not a miscellaneous deduction—the category that was affected by passage of the TCJA.
This provision is subject to some prohibitive rules, however. Gifts you give to family members or friends prior to your death aren’t tax-deductible. You can only claim those you make to qualifying charitable organizations. The IRS provides a tax-exempt organization search tool on its website, so you can check the status of any organization you’re considering to make sure it's approved.
Income in Respect of a Decedent
Beneficiaries can still deduct “income in respect of a decedent.” This is income that the deceased received and should have paid taxes on, but it wasn’t included on their final tax return. The beneficiary is therefore obligated to include it in their gross income for tax purposes, but they can claim a tax deduction for the amount.
Excess Deductions on Termination of an Estate
These are deductions an estate or trust could have claimed in its last year of operation but for the fact that its deductions exceeded its gross income. Some of these can be claimed by an estate beneficiary on Schedule A as a non-miscellaneous deduction not affected by the TCJA.
Consider retaining the help of a tax professional if you think you might be entitled to claim either of these deductions. The rules are complex.
Changes Under the Tax Cuts and Jobs Act (TCJA)
All other expenses associated with estate planning fell under the umbrella of itemized miscellaneous deductions, which the TCJA eliminated in 2018. These deductions were somewhat limited to begin with. You could only claim the portion that exceeded 2% of your adjusted gross income (AGI).
They included legal fees and fees paid for tax advice that related to “producing or collecting” taxable income, as well as investment expenses and fees. These included an estate planning attorney and accounting costs, as well as investment advice provided on behalf of a living trust.
Burial and funeral expenses have never been tax-deductible, nor have life insurance premiums or legal fees associated with drawing up a will.
But even the IRS refers to these deductions as having been “suspended,” not terminated. The TCJA has a definitive lifespan. It’s scheduled to expire at the end of 2025 unless Congress takes definitive action to extend it. Itemized miscellaneous expenses could well be restored to the tax code effective 2026.
Tax Breaks Your Estate Can Claim
The TCJA actually improved the tax rules for estates, even as it suspended tax deductions for expenses resulting from planning them.
Deductions for Administrative Expenses
Your estate can still deduct administrative expenses necessary to settle the estate. These can include attorney’s fees, accounting fees, property management fees, and commissions paid to the executor of your estate in exchange for their service. They can be deducted on your estate’s income tax return (Form 1041) or on its estate tax return (Form 706), but not on both.
Your executor will have the choice as to where and how to claim these expenses, but in most states, you don’t have to file an estate tax return, thanks to the TCJA.
The Unified Tax Credit
The unified tax credit is a dollar amount that an estate can exempt from its taxable estate value. Estates are only required to pay the federal estate tax on any portion of their value that exceeds this exemption amount.
The exemption was $5.49 million in 2017 before the TCJA went into effect. The act effectively doubled it to $11.18 million in 2018. It’s adjusted annually for inflation, so it increases from year to year. It's set at $12.06 million in 2022.
This doubled exemption is also expected to expire with the TCJA after 2025.
But there’s a slight catch. The exemption is referred to as “unified” because it covers both the value of your estate and any lifetime gifts you made to individuals or non-qualifying charities that exceeded the annual gift tax exclusion in the year you made them. You would owe an estate tax on $1 million in 2022 if your estate value was $12 million and you gave $1.06 million in gifts during your lifetime, for example.
The Unlimited Marital Deduction
Gifts and post-death bequests made to your spouse don’t count toward the unified credit threshold. They’re tax-free, provided your spouse is a U.S. citizen. Dollar limits come into play if your spouse is not.
Portability of the Estate Tax Exemption
A surviving spouse also can claim any unused portion of a deceased spouse’s unified credit under a provision referred to as “portability.” They could claim and add $6.06 million to their own estate and gift-tax exemption if the first spouse to die used only $6 million of the $12.06 million exemption that's available in 2022, as an example. The surviving spouse would have to file an estate tax return to claim it, however, even if no tax is owed.
Is Estate Planning Still Worth It?
Why go to the expense—without the benefit of a tax deduction—of creating an estate plan if you’re not passing on assets worth millions of dollars, and you’re not worried about exempting your estate from taxation? For one reason, some states also impose an estate tax that proper estate planning can help you avoid. Many of their exemption amounts are significantly less than those set by the TCJA through 2025.
Then there’s the matter of intestate succession. Your state will decide who will inherit your property, assets, and cash if you don’t leave an estate plan—even a simple will that cites whom you want to receive these things. This process is known as “intestate succession.” Your siblings and friends would not receive anything from your estate if you leave a spouse and/or children. This peace of mind may be just as important to you as whether you have to pay income tax on the small portion of your income that you spend to prevent dying intestate.
Frequently Asked Questions (FAQs)
How much does an estate plan cost?
You can create a simple will online for as little as $100, or you can purchase the necessary forms at an office supply store for perhaps $20. But you may have to pay around $1,000 if you want to hire an attorney to draft your will. It costs even more if your estate is particularly complex. You may want to have other estate-planning documents drawn up as well, such as a health care directive or power of attorney, should you become incapacitated.
When should you get an estate plan?
The general rule of thumb is that anyone who owns assets should consider drawing up at least a simple will, if not a full-fledged estate plan: Even an 18-year-old who’s reached the age of majority and is legally considered to be an adult. Otherwise, the state will move in to distribute their assets and cash.
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